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Monday, October 24, 2011

Arrowhead Research Acquires Roche’s RNAi Therapeutics Assets

The long wait is finally over. Almost a year* after infamously announcing its retreat from developing RNAi Therapeutics in-house as part of a corporate restructuring, Roche has sold its related assets to Arrowhead Research. That announcement sent shockwaves through the RNAi Therapeutics World as investors and potential licensing partners alike took this to mean that something was very wrong with RNAi Therapeutics technology. This led to a freeze in business development activities and precipitously falling valuations.Today’s news brings some closure to Roche’s sorry RNAi adventures and also promises a number of interesting revelations and developments in the months to come.

Arrowhead Research, of course, is already a well known player in RNAi Therapeutics through its Calando subsidiary. Arrowhead in my mind has suffered, however, from not realizing that in order to be a credible platform company, you actually need real scientists, and not just collect abstract intellectual property. It has always baffled me how Calando attempted to license its RONDEL delivery technology without even having a laboratory to overcome some of the apparent challenges of this technology.

With about 40 scientists that will join the company from Roche’s Madison, Wisconsin, site ('Mirus') this has obviously changed. This, however, also means that one should expect Calando’s RONDEL technology to be de-emphasized as these scientists will be more motivated to develop the Dynamic PolyConjugate (DPC) delivery technology they invented. As a reminder, DPCs have shown promise in mouse models for delivering siRNAs to selected cell types in the liver. It remains to be seen, however, whether this translates into primates, and whether DPCs have use beyond the liver. A recent imaging paper on DPCs suggests that the latter may be more challenging than one had first hoped (Mudd et al., 2010).Manufacturing and scale-up question will likely also need to be resolved first before entering clinical development.

A key question will be whether Alnylam will bless this spin-out or whether it will it try to undermine Arrowhead Research which has now gained access to, amongst other assets, Tekmira’s SNALP delivery technology and Alnylam’s own RNAi triggers. This could make the New Arrowhead a direct competitor of Alnylam, similar to Tekmira. While I am not sure yet whether Arrowhead management shares my view, but given the advancements of SNALP technology in the clinic, whilst DPCs have been stuck in pre-clinical for some time now, it would be obvious for Arrowhead to create near-term value by taking advantage of the well trodden path of advancing SNALP programs into the clinic. Of course, access to some of the newer lipids would be desirable.

For Arrowhead shareholders, this is likely a good deal given the depressed asset valuations in RNAi Therapeutics and Roche’s apparent desire to get out of RNAi Therapeutics. However, Roche will not be out entirely as it obtained a minority stake in Arrowhead and apparently retained licensing options and milestone/royalty streams to future products which are likely to be somewhat punitive considering that Arrowhead Research did not have much cash to offer.

Equally interesting for Arrowhead shareholders is a financing agreement with Lincoln Park Capital (LPC) under which LPC will provide up to $15M in funding over the next 3 years.Sounds familiar?If so, then you have probably seen LPC reach an almost identical deal with Marina Biotech just last week.The benefit for Arrowhead and Marina is that this source of capital brings some much-needed financial stability to the companies, just as Benitec used a similar arrangement with La Jolla Cove Investors to finance its recent transformation.One can expect, however, that LPC does not view their investments as charitable donations, and based on Benitec’s experience, it will both likely serve to support Arrowhead’s share price, but also somewhat cap its upside.

* An earlier version incorrectly referred to the waiting period as two years.

On the question of whether Arrowhead management will emphasize DPCs vs SNALP, here's a quote from the PR today:

"For instance, the Madison team has developed multiple generations of the DPC technology and generated large amounts of small animal and non-human primate data. We have not seen any RNAi delivery technology with better efficiency or tolerability."

Of course, you have to wonder why if the DPC technology is so great that Roche gave it away for virtually nothing. Unfortunately, the terms of this deal do not make me optimistic about the valuation given RNAi technology among big pharma today.

Dirk wrote:"...it would be obvious for Arrowhead to create near-term value by taking advantage of the well trodden path of advancing SNALP programs into the clinic. Of course, access to some of the newer lipids would be desirable."

On the conf call this afternoon, the CEO, when asked directly about the Tekmira license terms, admitted that the license is for a "specific generation" of SNALP technology. Would you assume that Arrowhead has access to Tekmira's 1st generation SNALP?

Also, I am wondering if the ARWR news today has any positive or negative effects upon valuation of Tekmira. I gather from your essay that you perceive the deal could heat up competition and conflict between ARWR and ALNY, so that the deal is potentially negative for ALNY.

On SNALP: based on Anzalone's answer, it does indeed seem to be the case that Roche only had access to the DLin-DMA SNALPs ('1st Gen'), although he refused to answer the question directly.

Overall, it will be interesting to see what Arrowhead will do with its non-Mirus delivery assets. Taking a cue from the merger between Silence and Intradigm, it is possible, if not likely that because of the biases of its new/'surviving' scientific team in favor of DPC that the other delivery technology assets that were talked about today will wither away. This is a neutral statement. Some people say lots of good things about DPC, despite some of the challenges that I see, but Arrowhead needs to demonstrate this publicly if they want to convince investors.

On what today's deal means about the value Big Pharma attributes to RNAi assets: a) delivery- many Big Pharma companies would not like to acquire an entire delivery platform with all the associated overheads, even if the upfront purchase price was zero; in that regard I agree with Arrowhead that outsourcing is the current industry trend; b) RNAi triggers- Roche paid over $300M for Alnylam's RNAi triggers (plus apparently uncertain rights to SNALP); RNAi triggers do not carry the high maintenance costs of delivery. Today's deal terms therefore say something about the market value Alnylam's RNAi trigger IP estate. This part e.g. could have been monetized separately from delivery, at least in part.

Sorry. Sometimes I tend to abbreviate which can be confusing. On the impact of today's deal on Tekmira. With DPCs publicly available again, SNALP technology faces a competitive technology, especially for knockdown in the liver. So a negative here. On the other hand, Roche had invested into SNALP-based programs which must have languished over the last year. Unless Mirus manages to steer management in Pasadena away from these assets, Roche's historical SNALP programs could spring back to life again, which would be a positive for Tekmira.

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